Risk management of tax practice

By CPABC
Last Revision: 1/1/2017

Are You Practicing Safe Tax?

Many practitioners are surprised to find out that over 50% of all claims reported by the CPA Professional Liability Plan Inc. (formerly AICA Services Inc.) are tax related. Common areas for claims include, but are not limited to, unexpected deemed dividends, early payout of capital dividend accounts, loss of dividend refund balances, and cross-border filing requirements.

Area of Involvement

No. of Claims (%)

Audit

9.1

Review

5.6

Notice to Reader

7.1

Tax

57.2

Management Consulting

0.4

Receiver /Trustee in Bankruptcy

2.7

Fee Dispute /Counterclaim

3.3

Shareholders Dispute

0.8

Purchase /Sale Agreement

2.7

Other

10.5

Bookkeeping

0.6

TOTAL

100.0

Provided by CPA Professional Liability Plan Inc. as of September 30, 2016.

Practising Safe Tax

There is a perception that assurance services, such as audits, are the more litigious engagements, but this is not the case based on the number of claims as indicated above. A possible factor contributing to these results could be the lack of uniform guidelines or standards of practice specific to the provision of tax services. For assurance engagements, firms have formalized quality control procedures, including engagement acceptance requirements, and pre- and post-issuance file review requirements, in order to comply with the applicable standards such as those published in the CPA Canada Handbook - Assurance

The only external requirements for the provision of tax services is for all members to meet the profession’s Code of Professional Conduct, such as ensuring due care and professional competence for all work performed.

That said, for any tax engagements, we suggest practitioners:

  • Acknowledge and accept the firm’s limitations by assessing the knowledge and practical experience of partners and staff members. Do you have all the competencies to meet all of your clients’ business needs? Given the complexity in tax legislations, jurisprudence, and positions taken by the CRA, practicing outside of your firm’s areas of expertise is a risk. Accordingly, you might consider establishing relationships with tax specialists to allow your firm to continue to provide a range of service while managing your own risk.
     
  • Obtain an engagement letter for all engagements. See the January 2016 Public Practice News & Views column for advice from Mr. David Wende in obtaining an effective engagement letter.
     
  • Follow the same or similar quality control processes for assurance engagements when performing all services provided by the firm. This might include engagement acceptance criteria, minimum documentation requirements, pre-issuance technical reviews, and post-issuance monitoring for compliance. 

CPA Canada Resources

CPA Canada continues to work on its "Best Practices in Tax" initiative to assist practitioners in designing standard processes and procedures to minimize errors and improve efficiencies. We encourage practitioners to follow the progress of this initiative by viewing a one-hour webinar on the CPA Canada website.

Part of this initiative includes the development of a tax risk questionnaire (TRQ) to assist small and medium-sized professional advisory firms to identify risk areas in their tax practice. Completion of the TRQ will result in the generation of an overall risk rating and a Risk Report highlighting the main issues for firm practice management considerations.

Practitioners can download the TRQ at www.cpacanada.ca/TRQ. [Currently, it is necessary to be a subscriber to CaseWare 2015 or 2016 to use the TRQ tool. A cloud version is in development and is expected to be completed in 2017. The cloud version will negate the need to be a subscriber to CaseWare.]

Upon download, practitioners will be granted a one-month free trial to CPA Canada’s Tax Risk Management Guide which identifies risk areas associated with different types of tax return preparation engagements, tax planning engagements, and tax litigation engagements, as well as risks that stem from a firm's practice management. Practical resources such as a sample personal tax return engagement letter and sample notice of appeal are also included in the resource.